Reform

Under Secretary Hirschhorn's Remarks to the European Defense Agency

Remarks of Eric L. HirschhornUnder Secretary for Industry and SecurityU.S. Department of Commerce

European Defence AgencyBrussels, Belgium

May 10, 2012

Good afternoon. I want to begin by noting that I arrived here in Brussels yesterday - May 9, Europe Day. It reminds us all what a great and irreplaceable institution the European Union has become in the past sixty-two years.

Thank you for the opportunity to discuss President Barack Obama's export control reform initiative.

Export control reform is a common sense approach to overhauling the U.S. export control system. The current system operates under 1970s-era statutory authorities and was designed to address the challenges of the Cold War world.

Consequently, our system remains fundamentally focused on the strategic threats of the Cold War era. Our control system makes equally outdated assumptions about how weapons systems are designed, developed, and produced, and about the interaction between dual-use and military technologies.

In August 2009, President Obama announced the export control reform initiative to update our system to one that addresses today's national security threats and economic opportunities.

Shortly afterward, the Obama Administration outlined its ultimate vision for a new export control system: a single licensing agency administering a single list, operating on a single information technology (IT) platform, and enforced by a single export enforcement coordination agency.

Fundamental reform of U.S. export controls is necessary to enhance our national security by:

focusing our limited resources on the threats that matter most;

increasing interoperability with our close friends and allies, such as those in the room; and

strengthening the U.S. defense industrial base by reducing the current incentives - specifically the "see through" rule under the ITAR - to "design out" U.S.-origin parts and components.

Reform will also ease the licensing burden on U.S. exporters, as well as their non-U.S. partners and end-users, and facilitate greater trans-Atlantic defense industrial cooperation.

We are trying to reform our export controls so that they will better serve our county's current national security and foreign policy objectives. Consistent with that effort, we are trying to develop controls that help strengthen and maintain our defense industrial base.

A key part of strengthening our export control system and defense industrial base is improving the interoperability of the weapons systems of the U.S. and our allies and friends.

We believe that this reform exercise has positive implications for the national security interests of your countries as well as the United States. We all will become stronger by cooperating on these important issues. And we view competition among companies in the defense sector as beneficial for the defense industry generally.

To implement the President's vision, some of which requires action by the United States Congress - and in particular the single control list, which will have the most direct impact on U.S. exporters - a number of important changes to our control lists are to take place under the existing regulatory framework.

The changes we are proposing for the U.S. Munitions List (USML) and Commerce Control List (CCL) will focus controls on the most sensitive items and destinations while facilitating exports to allied and partner destinations, such as our friends here in Europe. We expect this effort will eliminate much repetitive licensing paperwork while collecting sufficient information about the destination and end-use of the U.S.-origin items to enable us to enforce our controls effectively.

For the most part, all items subject to the International Traffic in Arms Regulations (ITAR), which governs the USML, are treated the same regardless of the risk involved.

For example, a bolt for an F-16 or F-18 fighter jet is controlled the same as the F-16 or F-18 itself. As a relatively simple, although certainly well-made and reliable, fastener for two components, the question is whether that bolt warrants a lot of documentation before it can be sent to a European government end-user.

We are mindful of the impact of these regulatory requirements on small and medium sized businesses. I'll give you an example: not long ago, I heard from a small business owner who must pay a $250 fee to the State Department for each license controlled under the ITAR for an item that sells for $200.

Further, the "see through" rule encourages foreign buyers to select non-U.S. parts and components for their weapons systems—even when a U.S. solution offers price, schedule and performance advantages—in order to avoid buying U.S.-origin parts controlled under the ITAR, whose presence will render the entire end product subject to U.S. reexport controls.

That is a system that undermines U.S. national security by harming our industrial base, hampers trans-Atlantic defense industrial cooperation, and can hamper interoperability of U.S. military forces with those of our friends and allies.

We are taking a number of steps to improve the system.

Most importantly, this involves rebuilding the USML into an objective list that clearly identifies what is controlled, and transferring to the more flexible CCL items that neither perform an inherently military function nor provide a critical military or intelligence advantage.

The Export Administration Regulations (EAR), which govern the CCL, contain specific controls based on countries, regions, and individuals. The EAR enable the U.S. Government to make more nuanced distinctions among destinations and end-users, and apply a greater variety of authorizations, than do the ITAR.

The EAR are more flexible and provide greater certainty to the exporter. The transfer of items to the CCL will remove: (1) annual registration requirements and related annual registration fees; (2) the requirement for a multitude of authorizations; and (3) the "see through" rule that controls even a minor USML part or component as a defense article in perpetuity, even after it is incorporated into a foreign customer's far larger end product.

Strategic Trade Authorization

By moving militarily less critical U.S. parts and components from the USML to the CCL, export control reform will promote greater coordination with our friends and allies.

For example, items transferred to the CCL will be eligible for the Strategic Trade Authorization (STA) license exception, which streamlines exports of such items to 36 close NATO and multilateral regime partners for ultimate end use by the governments of those countries. This enhances interoperability with our closest friends and allies, strengthens the competitiveness of the U.S. defense industrial base, and promotes greater trans-Atlantic defense industrial cooperation.

Although STA eliminates many burdens associated with typical front-end licenses, it does contain specific restrictions, and it is eminently enforceable.

Exports and reexports to other countries and for other uses will still require a license. Moreover, exports and reexports of such items to countries subject to U.S. arms embargoes, such as China, still will be presumptively denied.

The idea of STA is simple: facilitate exports to NATO and multilateral export control regime partners who share our national security interests, while ensuring that subsequent exports to non-STA destinations are properly authorized.

This license exception will encourage collaboration in developing and producing defense systems, reduce costs, and shorten delivery times to you for U.S. parts and components.

The Department of Defense estimates that many thousands of less significant parts and components will move to the CCL and be eligible for license-free export to STA-eligible countries for the government's ultimate end use.

There also are a number of enforcement aspects to STA. An exporter wishing to use STA must, prior to export, inform its overseas customer of the precise export classification of the item. The non-U.S. customer must confirm its understanding of that classification, and must undertake not to export, reexport, or transfer that item contrary to the EAR. These written exchanges provide the information necessary for effective enforcement and are far easier, cheaper, and faster for companies to administer than conventional export licenses.

Incidentally, the use of STA is optional. Any exporter who prefers to obtain an actual export license may do so.

STA is a critical component of our goal to promote interoperability.

When we sell our allies and coalition partners a military system, like a fighter or a tank, or subsystems and components, we also need to provide the spare parts to keep them operating.

Secretary of Defense Gates told the story of a C-130 that was needed for coalition operations but had to sit idle for two months waiting for the State Department to license necessary spare parts. That situation has been likened to giving someone an elephant but then requiring him to beg for the peanuts.

Our friends and allies need to have confidence that the military systems on which they rely will be operational when needed.

We cannot afford to wait, or have our friends and allies wait, for a license for spare parts of an end item that we have already authorized.

USML- CCL Proposed Rules

The Obama Administration is committed to getting our control list categories rebuilt as soon as possible. Commerce, State and Defense have agreed on most of the proposed revisions of categories from the control lists.

We already have five sets of comments on proposed rules available for public inspection. Over the coming months, we anticipate publishing for public comment proposed rules on 10 more control list categories.

We recently published a proposed rule on energetic materials (Category V) and released a joint Defense and State Department report on satellite export controls. Proposed revisions to the remaining USML categories will be published for public comment over the next several months – small firearms (Category I), parts and components for larger guns (Category II), ammunition (Category III), toxins and related items (Category XIV), auxiliary military equipment (Category XIII), military training equipment (Category IX), protective personnel equipment (Category X), electronics (Category XI), and sensors and night vision devices (Category XII).

As we rebuild the control lists, we are working with our oversight committees in the United States Congress to complete statutory notification requirements necessary to transfer items to the CCL.

Section 1248 Report and Satellite Legislation

The Administration is also working with Congress on restoring the President's authority to determine export control jurisdiction for satellites and related components. Two weeks ago, the Defense and State Departments issued a joint report to Congress assessing the national security risk of transferring controls on commercial satellites and related components from the USML back to the CCL.

In response to the unauthorized transfer of sensitive technology in connection with satellite launches in the 1990's, current law requires the U.S. government to control commercial satellites on the USML regardless of whether an item presents a national security risk. This shift in jurisdiction has hurt U.S. industry without providing a commensurate national security benefit.

The Aerospace Industries Association (AIA) has noted that when Congress shifted jurisdiction to the State Department in 1999, the U.S. satellite industry had seventy-five percent of the world market. Today, according to AIA, that share has decreased to less than twenty-five percent. Treating all satellites as defense articles may not be the sole reason for the decline but few doubt that it has played a significant role.

The Administration is currently briefing Members of Congress on the report and hopes Congress will pass legislation allowing satellite controls to be treated like the other control list categories. Like the other categories we are reviewing under the USML-to-CCL process, no satellite or related components will be moved from the USML without careful review and approval by the Defense Department.

Additional Reform Efforts

Just as we seek to remedy problems with our control lists, we are working to improve the enforcement of U.S. export controls.

Export Enforcement Coordination Center: In November, we opened the Export Enforcement Coordination Center, which coordinates and "deconflicts" activities among the export control enforcement agencies.

Information Triage Unit: The Administration has also established an Information Triage Unit (ITU) to enable more efficient and informed U.S. export control decision-making. The ITU identifies, compiles, coordinates and reports all-source information regarding foreign parties to controlled export transactions.

The Obama Administration—right up to the top—remains committed to moving forward. Our ability to innovate and to support the next generation of defense and commercial products should not be hamstrung by outdated export control rules that undermine, rather than enhance, U.S. national security.

Although our resources are limited, we are striving to complete export control reform as quickly as possible.